Need to Know: Bitcoin and bonds won’t cut it. Buy these 6 types of assets for protection in a bear market, says strategist.

United States

Wednesday was a quiet day for markets, and Thursday looks set for the same in what may be a taste of doldrums in the summer ahead.

But that doesn’t mean investors should kick back and relax in the sun just yet, because major risks to stocks remain. If a bear market is indeed on the horizon, investors need to look for new, uncorrelated assets to survive the next selloff, advised Vincent Deluard, a strategist at broker StoneX, in our call of the day. The strategist said to look at six types of assets in particular, because bitcoin and bonds just won’t cut it.

“Risks are everywhere in a time of peak liquidity, peak valuations, and peak economic optimism,” the strategist said, with stocks 50% to 100% more expensive than they were at the height of the 1990s dot-com bubble. 

And market concentration is also more extreme, with U.S. stocks accounting for 56% of the MSCI World Index. In fact, tech giants Apple AAPL, -0.53%, Amazon AMZN, -0.22%, Facebook FB, -1.21% and Microsoft MSFT, +0.15%, electric-car maker Tesla TSLA, -0.89%, and graphics microchip maker Nvidia NVDA, +4.88% have the same market capitalization as the U.K., German, French, Italian, Russian, and Polish indexes…combined.

This sets the stage for stocks on a hair trigger. “Unfortunately for investors, traditional hedges are expensive or ineffective, or both,” Deluard said.

For the first time in 15 years, long-term Treasuries — “the ultimate risk-off asset of the past decade” — are positively correlated with stocks, and the typical inverse relationship between stock valuations and the price of options has broken down.

“Investors’ desperate rush for the holy grail of diversification has reduced the appeal offered by traditionally uncorrelated assets: gold GOLD, +0.92%, the Yen USDJPY, +0.03%, the Swiss Franc USDCHF, +0.31%, and bitcoin BTCUSD, +5.01% have lost value during recent equity selloffs,” Deluard said, but gold and commodities have proved better protection against recent inflation surprises.

According to Deluard, the five main risks of 2021 are rising yields, inflation surprises, wider spread, an equity market selloff, and a “blowup” of overpriced growth stocks.

Deluard’s advice is to look at six types of assets to best protect yourself against these specific risks in the year ahead. Financials, commodities, and energy stocks are the best hedges, Deluard said, which dovetails with his bullish view on Latin American — and especially Mexican — assets. Bets on those cyclical sectors should be complemented by traditional risk-off plays such as gold and Japanese stocks, the strategist added.

“This barbell portfolio should protect investors against the main risks of 2021 at a relatively cheap price,” Deluard said. “Rare, good news in an otherwise bleak environment.”

The markets

U.S. stocks DJIA, +0.19% SPX, +0.08% COMP, +0.09% opened higher, after stock market futures remained in the red for much of the premarket. Equities in Europe SXXP, +0.57% UKX, +0.04% DAX, +0.74% PX1, +0.75% and Asia NIK, +2.10% HSI, +0.04% SHCOMP, -0.22% were mixed but mostly positive, with no huge moves in either direction among the major stock-market indexes.

The chart

Chart via AJ Bell. Source: St. Louis Federal Reserve database, U.S. Bureau for Labor Statistics

Between stories of fast-food restaurants struggling to find burger flippers and news that Amazon will hire 75,000 workers at an average pay of more than $ 17 an hour — well above U.S. minimum wage — rising pay is on the mind.

“Workers and their families may well be thinking ‘about time, too,’” said Russ Mould, an analyst at AJ Bell, who provided our chart of the day. “Since 1947, Americans’ pay has fallen by 5 percentage points as a portion of GDP. American corporate profits have increased by almost exactly the same amount.”

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